Bread Financial Holdings Inc (BFH) 2024 Q2 法說會逐字稿

Morning, and welcome to Bread Financial's second quarter 2024 earnings conference call. My name is Towanda and I will be coordinating your call today. (Operator Instructions)

It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Bread Financial. Sir, floor is yours.

Thank you. Copies of the slides we will be reviewing in the earnings release can be found on the Investor Relations section of our website at breadfinancial.com. On the call today, we have Ralph Andretta, President and Chief Executive Officer and Perry Beberman, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are based on management's current expectations and assumptions and are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC.

Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website.

With that, I would like to turn the call over to Ralph Andretta.

Thank you, Brian, and good morning, to everyone joining the call, starting with the highlights from the second quarter on slide 2, I am pleased to report another quarter of solid results as we continue to navigate a challenging consumer and regulatory environment. Our strong results include net income of $133 million and earnings per diluted share of $2.66 for adjusted diluted EPS of $2.67 after adjusting for the anti-dilutive impact of our capped call transactions, which are related to the 2023 issuance of convertible notes, which Perry will discuss more fully.

Notably, our balance sheet continued to improve as we increased our tangible book value by 25% year-over-year to nearly $49 per share improved our common equity Tier 1 capital ratio by 170 basis points year-over-year to 13.8% and reduced our double leverage ratio to 110%, achieving our target of less than 115%.

Additionally, direct to consumer deposits increased 20% year-over-year to $7.2 billion, representing 14 consecutive quarters of growth. During our Investor Day in June, we highlighted the company's transformation and our energized culture, the strong returns and capital generation that our business model can deliver and how our responsible capital allocation will build sustainable long-term value for our shareholders.

We also announced our newest partnership with Saks Fifth Avenue in the third quarter of this year. We expect to complete the conversion of the existing Saks portfolio and launched a new and enhanced products. In the second quarter, we made further progress implementing more of our mitigation strategies and response to the CFPB's rule on credit card late fees.

Our ongoing discussions with brand partners have been productive and we now have various pricing changes in market, including increased APRs and statement fees. We are closely monitoring the ongoing litigation related to the rule and will continue to implement our mitigation strategies given the uncertainty surrounding the timing and outcome regardless of the litigation outcome. We are confident in our ability to generate strong results and achieve our long-term strategic objectives and financial targets.

From a macroeconomic perspective, consumer spending continues to moderate, reflecting persistent inflation and higher interest rates. As a result, second quarter trends reflected lower transaction sizes accompanied by more frequent shopping trips as well as reduced discretionary and big ticket spending. Credit sales were also impacted by our proactive credit tightening as we remain disciplined given economic pressures affecting payment capacity. Our credit actions have proven effective as delinquencies have trended lower and the net loss rate is expected to have peaked in the second quarter.

Our second quarter results reflect our position of strength with increased capital flexibility and financial resilience. We are better equipped to address uncertainty than ever before, positioning us well to generate long term value for our shareholders.

Turning to slide 3, our disciplined capital allocation strategy focuses on funding responsible profitable growth, improving our capital metrics, reducing parent debt and driving long-term shareholder value. Indicative of the success of this strategy is the 410 basis point improvement in our common equity Tier 1 capital ratio over the last three years, as shown in the chart on the left.

As I mentioned previously, we have also made progress on our debt reduction as shown in the second chart, over the last three years, we have reduced parent-level debt by 53%. And this quarter, we achieved our long-term double leverage ratio target of less than 115%. This is an impressive achievement given where we were just four years ago when I joined the company.

Finally, our tangible book value of $49 per share has grown at a 22% compound annual rate since the second quarter of 2021. Supported by our strong cash flow, we expect to continue to grow our tangible book value over time.

Turning to slide 4. Our key focus remains on growing responsibly, managing the macroeconomic and regulatory environment, accelerating digital and technology offerings and driving operational excellence. As we highlighted during our Investor Day in June, our decisions are focused on creating sustainable value over the long term by effectively managing our credit risk while scaling and diversifying our product offerings we can grow responsibly.

Managing the macroeconomic and regulatory environment effectively is fundamental to our success. Although litigation is ongoing and timing and an outcome unknown, we will continue to take actions to mitigate the potential financial impact of the CFPB late fee rule.

We are confident in our strategy and have an experienced leadership team that has successfully navigated through regulatory changes in the past, such as [Card]. Accelerating our digital and technology capabilities remains a top priority. We are committed to fueling innovation, leveraging data and AI and scaling our platform to enhance satisfaction for our customers, partners and associates.

Finally, our heightened focus on operational excellence to drive improved customer experience, enterprise-wide efficiency, reduce risk and value creation is embedded in our decision making. Our goal is to consistently generate operational and expense efficiencies that enable reinvestment in our business, support responsible growth and achieve our targeted returns. Our experienced leadership team remains focused on generating strong returns through prudent capital and risk management, reflecting our unwavering commitment to drive sustainable, profitable growth and build long-term value for our shareholders through challenging economic and regulatory environments.

Now I will turn it over to Perry to review the quarter's financials and to discuss our outlook.

Thanks, Ralph, and good morning, everyone. Before I dive into the second quarter financial highlights, I'd like to discuss the financial benefits of the capped call transactions we entered into when we issued our convertible notes in 2023. The capped call transactions are set up to reduce the potential dilutive impact of the convertible notes up to a stock price of $61.48. Our GAAP diluted share count does not incorporate the anti-dilutive impact of these cap call transactions, which you can see incorporated in our adjusted non-GAAP figures on slide 5.

More specifically, this share amounts used in calculated calculating adjusted net income per diluted share and adjusted income from continuing operations per diluted share have been adjusted for the anti-dilutive impact of our capped call transactions. Reflecting this, our adjusted net income per diluted share was $2.67, and our adjusted income from continuing operations per diluted share was $2.66 in the second quarter.

Moving to slide 6, which provides our second quarter financial highlights. During the second quarter, credit sales of $6.6 billion decreased 7% year-over-year, reflecting moderating consumer spend in our strategic credit tightening, partially offset by new partner growth. Average loans of $17.9 billion increased 1% year-over-year, driven by growth in co-brand programs, highlighting our continued focus on product diversification.

Revenue was $0.9 billion in the quarter, down 1% year-over-year due to reduced merchant discount fees resulting from lower big ticket credit sales. Income from continuing operations increased $69 million due to a higher reserve release and lower noninterest expense compared to the same period last year.

Looking at the financials in more detail on slide 7, total net interest income for the quarter remained essentially flat year-over-year, while noninterest income is down $8 million, resulting from the previously mentioned lower merchant discount fees on big ticket purchases.

Total noninterest expense decreased 12% year-over-year, primarily driven by a decrease in card and processing costs, including fraud and a reduction in depreciation and amortization costs and marketing expenses additional details on expense drivers can be found in the appendix of the slide deck posted on our website. Pre-tax pre-provision earnings or PPNR, increased $48 million or 11%.

Turning to slide 8. Loan yield increased 30 basis points year-over-year, benefiting from the upward trend in the prime rate, which caused our variable priced loans to move higher in tandem along with some small amount of CFPB mitigation related APR increase impact, both loan yield of 26.4% and net interest margin of 18.0% were lower sequentially following typical seasonal trends, we expect a seasonal improvement in the net interest margin in the third quarter of 2024.

On the funding side, we are seeing total funding cost moderate as deposit costs are stabilizing. Additionally, as you can see on the bottom right chart, our funding mix continues to improve, fueled by growth in direct to consumer deposits. Which increased to $7.2 billion at quarter end, while wholesale deposits declined. Direct to consumer deposits accounted for 40% of our average total funding up from 33% a year ago. While we anticipate that direct-to-consumer deposits will continue to grow steadily, we will maintain the flexibility of our diversified funding sources, including secured and wholesale funding to opportunistically and efficiently fund and manage our long-term growth objective.

Moving to credit on slide 9. Our delinquency rate for the second quarter was 6.0%, modestly down 20 basis points from the first quarter as a result of our credit-tightening actions. From this point forward, we expect future quarters to largely follow historical seasonal trends until we see broader macro economic improvements. Net loss rate was 8.6% for the quarter compared to 8.0% in the second quarter of 2023 and 8.5% in the first quarter of 2024.

The second quarter, net loss rate was elevated compared to last year due to more challenging macroeconomic conditions, pressuring consumer payment rates as well as ongoing credit tightening and our slower responsible loan growth impacting the denominator. As anticipated, the second quarter net loss rate is expected to represent the peak for 2024. We anticipate a reduction in the net loss rate in the third quarter to 8% or slightly below before increasing seasonally in the fourth quarter to the low 8% level. Our outlook assumes a slow, gradual improvement in the macroeconomic environment. It will take time for the lingering effects of a prolonged period of elevated inflation to dissipate.

As expected, the reserve rate of 12.2% remained within the range we have seen over the past six quarters. In this challenging macroeconomic environment, our conservative economic scenario weightings remained unchanged in our credit reserve modelling, and we believe our loan loss reserve provides an appropriate margin of protection, consistent with what I said last quarter. And based on our economic outlook, we expect the reserve rate to be lower at year end 2024 versus year end 2023, reflecting an overall improvement in delinquencies as well as improved credit quality in the portfolio.

Further, our total loss absorption capacity comprised of the total company, tangible common equity plus credit reserve rate ended the quarter at 26% of total loans, an increase of 100 basis points from last quarter and 270 basis points from a year ago, demonstrating a strong margin and protection should more adverse economic conditions arise.

Looking at our credit risk distribution mix. The percentage of cardholders with a 660-plus credit score improved 200 basis points sequentially and remained above pre-pandemic levels despite continued inflationary pressures. This improvement is primarily a result of our prudent credit tightening actions as well as our more diversified product mix. We continue to proactively manage our credit risk to protect our balance sheet and ensure we are appropriately compensated for the risks we take.

Moving to slide 10, which provides our 2024 financial outlook. While there is uncertainty surrounding the timing and outcome of the ongoing CFPB late fee roll litigation. Our outlook now assumes no impact from the CFPB late fee rule this year.

Considering that a state is in effect, the number of motions hearings and other procedural matters, including appeals expected to take place in the litigation over the coming months as well as a presumed implementation period following the final legal rule and our base case is that the rule does not become effective in 2024.

Our full year contemplates a slower credit sales growth rate as a result of moderation in consumer spending and credit tightening, both of which pressure loan and revenue growth and the net loss rate in the near term. In addition, our 2024 outlook assumes two interest rate decreases by the Federal Reserve in the second half of the year, which are expected to slightly pressure total net interest income. Based on our current economic outlook, proactive credit tightening actions, higher gross credit losses and visibility into our new business pipeline. We expect 2024 average loans to be down low single digits on a percentage basis relative to 2023.

Total revenue growth for 2024, excluding gain on portfolio sales is anticipated to be down low to mid single digits with a full year net interest margin lower than 2023 reflecting higher reversals of interest and fees due to expected higher gross credit losses, declining interest rates and a continued shift in product mix to co-brand and proprietary products. This guidance includes the impact of early CFPB mitigation pricing changes, which are not material to the full year 2024 guidance.

As a result of efficiencies gained from ongoing investments in technology modernization and digital advancement, along with disciplined expense management and reduced fraud, we expect expenses to be down mid-single digits relative to 2023. Expenses are projected to increase in the second half of 2024 versus the first half, driven primarily by the addition of Saks Fifth Avenue portfolio and increased sequential marketing expenses around $10 million in the third quarter. We would expect fourth quarter expenses to be higher than the third quarter based on seasonally higher employee compensation and benefits costs and further increased marketing expenses.

As I mentioned earlier, the second quarter. Net loss rate is expected to be the peak for the year, and we continue to expect a full year net loss rate in the low 8% range for 2024 with the first half loss rate at 8.6% and a projected improved second half loss rate of approximately 8%. That would currently imply a full year net loss rate of around 8.3%. Again, our outlook assumes a gradual modest improvement in economic conditions throughout the year, aligned with most economists.

Finally, our full year normalized effective tax rate is expected to be in the range of 25% to 26% quarter-over-quarter. Variability will continue due to timing of certain discrete items. We are confident in our ability to successfully manage risk, return trade-off through this challenging macro, economic and regulatory environment while continuing to make strategic investments that drive long-term value for our stakeholders.

Before opening the call for your questions. I want to take a moment to reiterate the financial targets that we shared during our Investor Day in June. You can see these targets on slide 11. Note this slide assumed an October 1, CFPB late fee rule change effective date. From a debt perspective, as Ralph mentioned earlier, we've already successfully reduced our double leverage ratio to less than a 115%. For capital, our goal is to build total risk-based capital to around 16% with an initial CET1 build to approximately 14%. Over the longer term, we plan to optimize our capital mix through additional Tier 1 and Tier 2 capital, which will allow us to lower our corresponding CET1 ratio.

Overall, we will continue to grow tangible book value with the goal of generating a low to mid 20% ROTCE. in the medium term and mid 20% ROTCE in the long term. While there are many scenarios currently in place regarding our timing to achieve our targets, given the uncertainty around the economy and potential regulatory changes, we are well positioned to deliver responsible growth, strong returns and capital distribution opportunities over time.

Operator, we are now ready to open up the lines for questions.

(Operator Instructions)

Mihir Bhatia, Bank of America.

Good morning. Thank you for taking my question. I wanted to start, maybe you were talking about just the purchase volume trends. Look, you obviously have a pretty diverse customer base and you've talked previously about low-income consumers being impacted by inflation.

And so I guess a couple of questions on that. One is, are you seeing those impacts starting to moderate as we've had some wage growth here and then also, relatedly, is the pressures on the consumer spreading up the income scale. Are you still seeing the pressure is concentrated in that segment? Maybe just talk about that a little bit just trouble where you're seeing the pressures on what kinds of products, what kinds of retailers or categories may be thinking?

Yes. Thanks for the question. I think, yes, we're still seeing consumers no matter where they are in the Vantage change, self moderate and self budget. You know, we see the biggest impact in discretionary and big ticket is where we see the biggest impact in terms of spend moderation. And but yes, I think as we move forward, as we said, we think we've peaked in the second quarter. I don't think it's going to be an immediate rush to the point of sale. I think it's going to be a gradual improvement over time.

People are still suffering from high inflation and high interest rates. So while we are, we're anticipating a little bit of improvement and I think it's going to be very moderate as we move forward. But big ticket and discretionary spend with the biggest impact.

Anything from the -- on the income side? Like is it just mostly still in the low-income consumer only?

Yes. So this is very so what I think I'd share with you. Is that view on the economy overall on the I think we've been saying this and I think we're all seeing the consumer's been pretty resilient, but they are they are definitely feeling the effects of that cumulative prolonged period of inflation and higher interest rates are impacting them for inflation, still about 2%, whilst coming down, that's a positive higher interest rates on things like their mortgages, auto credit cards, personal loans at the roads there, their spending power, right, and some will be through higher monthly interest cost.

So you've got that affordability gap that's still out there for lower and middle income Americans. And I think that's where you're going is right. The top third of the consumers are just fine there, higher income, higher scoring. They're not shown any signs of stress, and we're seeing that our portfolio, those high on scores are not being affected, but that doesn't tell us where to go to thirds. And you are starting to see some of that stress creep up a little bit in the risk scores because these folks are trying to make ends meet and these other things are putting pressure on them.

Now that said, there are positive signs that we're seeing and I think we're all seeing it with what we expect to materialize in the second half of the year. And it was led by what we just saw with this quarter where, as you mentioned, wage growth outpaced inflation. So that is good and that's particularly going to help the two thirds of the consumers who are trying to rebuild their discretionary income. And I think that's going to be a positive inflation is coming down. So hopefully, again, wage growth stays up, inflation comes down. That's more positive.

Now you will have a little bit offset with some modest increase unemployment that I was expecting to finish the year below 4%, but that's all in our outlook and forecast. But so we're monitoring the consumers really carefully. We have a really strong credit team that has taken credit actions appropriately and-- but I think we're all waiting to see how this economy unfolds in the back half of the year.

And then if I could switch gears on credit just up, obviously up 2Q came in better than your initial guide. You gave some pretty good commentary on 3Q and 4Q and what your expectations are and what I was curious, though, was what is your view as you enter into 2025? Should that do you expect losses to continue to moderate? I mean, you mentioned something about them being kind of it seems low. Do you see the economy improve? So like my question is really do you need the economy to improve to get your losses down towards your target or have the credit actions you've taken drive that loss rate lower closer to your long-term targets? Because you I mean, you're still at 8%, right? So if you just get seasonality from here, like I was just going to stay above the long-term target. Still you get to economic improvement?

So I think you have a couple of things and a number of things that go into that. I'm not going to give guidance on 2025 at this point, but I can give you my thoughts on how this trend is going to play out over time, right? Our credit actions, we'll the peak benefit will happen in the second half of this year. So the full benefit of our credit actions haven't yet materialized all the way through. So that will be a run rate benefit into, call it 2025. Then we're expecting a what I'll say is a slow gradual improvement in customer behaviour.

It's going to take a prolonged number of quarters for the consumer behaviour to improve, given that they're trying to deal with three years of this persistent high inflation, higher interest rates, right? And that is going to take time to unwind. I mean, there is no fast fix. We're not expecting a big stimulus to come in and all of a sudden consumer payments just improve dramatically. So I expect there to be a slow gradual improvement through next year. But to get back to that 6% number that fast scenes on that would be a tough ask of the consumer, but I do think there's going to be continued gradual improvement.

Thank you for taking my questions.

Thank you.

Jeff Adelson, Morgan Stanley.

Hey, good morning, guys. Thank you for taking my questions. I just one point of clarification on the revenue guide. I know you removed the late fee rule implementation from the fourth quarter versus your last quarter guide. But I think last quarter, you also had discussed a scenario where the late fee rule didn't go into it that you were looking for, I think down mid-single now you're looking for down low to mid-single digits. Can you just talk about where some of the improvement came from there? Is that just continued efforts on on the late fee offsets and CITs you've put out there or what else may have changed in the outlook?

It's a modest change in the outlook to your point. I think part of it is we're only expecting two rate reductions, Fed rate reductions. As remember, we're a little asset sensitive. So we will see a little bit of new compression when you have that. We also pricing a little bit more confident about the second half of the year loss rate and what that means in terms of reversal of interest and fees. And then we also have on the line of sight into the CFPB mitigation actions while not material. And It's just we're just trying to get everything I doubt a little tighter to what we expect to see.

And just a follow-up on credit. I know at the Investor Day you're talking about some nice stability and, you know, not only your early stage, but your mid and late stage delinquencies. Could you just give us an update on what you're seeing there this quarter? And if I could maybe just nitpick a little bit on the monthly data, it does look like your second derivative on total delinquencies did increase a little bit this past month. Is there anything to that or do you probably still expect that trend of slowing will kind of continue to come through?

Yes, I think what I would characterize things as stable and improving on that. Again, if we're in an improving economy, credit actions are taking place, you've got some seasonal things happening within delinquency. So again, our early stages is stable and we're starting to see some improvement in very slow improvement in those mid to late stages. But the roll rates remain high in those later stages because nothing's changed for and I'll say that consumer who does go delinquent, they have a hard time getting out of delinquency once they're in. And that's when you think thematically around why you need wage growth and things to improve for them, that's what we hear from the customer, what strain them. It's just that high inflation and wages aren't keeping up.

Thank you for taking my questions.

Sanjay Sakhrani, KBW.

Thank you. Perry continue on maybe just talk about what you might be looking at in your data to give you an indication of whether or not the consumers sort of flat to doing worse than I mean, do you look at like monthly minimum payments, cash drawdowns? I'm just curious because I think there's a lot of confusion, as we've heard from some of the questions before, we're hearing the consumer slowing down their spending. But you guys are saying and this is the industry so the consumers generally fine. So maybe you could just give us a little bit more on sort of what informed view that the consumer is doing well.

And then secondly, just if rates are coming down, how quickly does that feed into the health of your consumer? Does it help them improve their health? Does that help?

Sanjay, great questions in there from. And that's where the benefits of having as many consumers as we do, that we can monitor through stratification segmentation. We do look at what's happening with our consumer, and we've talked about this before. When you hear I'll say the big banks talk there, they have a much fuller view of the high net worth customers. They have the view of customers were not credit eligible that we don't underwrite.

So you'll hear things from the big networks and they're giving perspectives on spend overall. What we monitor are things like their payment trends how many people are making no payment, how many people are making min pay multiples and then pay. So we are starting to see fewer customers at zero pay and more making min pay, but that's something we monitor very carefully.

So you do look at come on us paying behaviours of us, payment behaviours. So I think it's But so when we say the customer is also improving its from the result of the credit actions and a little bit of this wage growth that's in place. So I don't want to give an indication that while things are improving dramatically, it's stable with modest improvement. And that's what we expect to see in the back part of the year. I mean for us to guide that for sort of 8% losses in the back half of the year. It still is a pretty strained environment for the consumer while improving. It's going to take a slow gradual improvement for folks return to our I'll say, through cycle targets.

Okay, great. And then, your base case for late fees change to improvisation Exeter, can you just maybe give us a little bit more detail on sort of how those mechanisms work and then how does that, you know, like your ability? I mean, I don't know that in terms of how much of an emphasis I've always felt like you can offset it, then you can still grow book value. But I'm just curious on the margin, what kind of impact does it have to the fundamentals on a go forward basis? Is your ability to sort of overcomes some of the impact?

Yes. So look, the reason why we took it out of our guidance for this year. And and when we see where things are going right now, the parties involved with the litigation, they're still litigating over where this litigation should be heard right. And that now is set for August 27th. And that could possibly result in another appeal of the judge's ruling. And this is before the courts actually consider the merits of the lawsuit filed by the industry. So that's why we don't think the impact will happen in 2024. But we're not taking that assumption of what that could mean to 2025, but the teams continue to work very closely with all of our brand partners.

We've been very thoughtful about the timing of when we roll out changes to consumer for some of the changes that we have put in the market. We took a half step towards the back part of 2023 through some pricing that was already in our guidance, some of the things that we just put market around paper statement fee and some again, further pricing APR increases. As you know, APR increases take time 18 months to up to three years to fully get the benefit of that to work through the P&L. And we're also monitoring very closely any change in customer behaviour, right?

Because you don't want to have the unintended consequence worth much more than offset the good of what you're trying to get from it. So that's being carefully watched and done. So the rollout will continue throughout this year, we're assuming the it change will go into effect at some point next year. We don't really have our guide on that at this point, but we have the teams working as if it will happen in short order, right after the litigation gets through. Again, not know any outcome of the upcoming elections. And we don't to speculate on that.

Thank you.

Moshe Orenbuch, TD Cowen.

Great. Thanks. And most of my questions have been asked and answered, but maybe it's coming back to that kind of macro issue of low end consumer.

And and as you know, that the timing of kind of rebounding of growth. Is there a way to counter segregate out portions of your of your portfolio or your partners just think about like what could be kind of earlier and later in that. How do you sort of think about that and kind of because we've noticed some of that in our kind of low end furniture type. We're starting to see a little bit of a rebound. So is there a way to kind of talk about what portions of your portfolio or even where there's been and that pressure and when we could start seeing some of the rebound and then what.

So I'd answer that a couple of ways. One will answer. With regard to our rebounding growth. We're going to have a number of tailwinds behind us from a growth standpoint. One think about general macro improvement, like you said, these consumers start to get on wage growth going inflation comes down that can free up more discretionary income that will help the lower end consumer and wage growth has been more prominent in the lower income brackets than the high income bracket so that that will be an aid to these consumers.

On the second thing that will impact our I'll say, loan growth is when we march back down towards a 6% loss rate versus being over eight, you think about the interest and fees associated with that to, that's almost a 3% tailwind as we march back towards that. And then as the consumers improve, and we then unwind some of those credits tightening spreads that were in place around line increases, higher approval rates and all that will as well be a tailwind to growth. And that's not being mentioned what Ralph talked about, the terrific business development team that we have out there that are continuing to win opportunistic deals for us.

Got it. Thanks. Maybe just kind of thinking on that know on that note, as you kind of look out at the landscape, do you see and opportunities for additional portfolios, either conversions or kind of start-up opportunities. And now you know that perhaps the fee issue is at least on hold for a while. But how are you how are the potential partners? What's that channel?

Yes, Ralph, we do we announced the Saks Fifth Avenue earlier this year and early this quarter. Really excited about that to get that in the next in the third quarter. And this morning, we just announced HP. So we're excited about that opportunity. It's a de novo opportunity for us. And if you look at HP, we have Dell, Sony and even to B&H Photo in there, we have a real-nice electronic vertical, which we really like.

And the pipeline is always active and our business development team all match up against any. I think it's second to none, and we're always engaged in those those deals that are coming due. And also, again, what I love about our team, it's up and down the spectrum. So it's $100 million deals to the billion-dollar deals. We're able to play very comfortably in that with those guidelines and they're active and busy, and we certainly see them. We win more. We know we win more than our fresh fair share as we go forward.

Yes. And yes, but you've asked a question about with the CFPB on happening or not happening. One thing I think that's common in the marketplace. All of our competitors are, I'll say, pretty rational, right? Sometimes something that's strategic that somebody wants to win really badly and I won't take on lesser economics. But traditionally you win based on your capabilities and the partnership and the CFPB, our ruling is contemplated in the economics through the discussions, whether the partner somewhere else, if they stay where they are or they come to us, it has to be contemplated. And we are very capital disciplined. And with the amount of opportunity in front of us, we're also making sure we're selective with who we're signing and that it fits with our strategic verticals as well as delivering the right capital return for our shareholders.

Great. Thanks very much.

Bill Carcache, Wolfe Research Securities.

Thanks. Good morning, Ralph and Perry. Following up on your comments about the resiliency of the consumer, there is a view among some that we could see a delayed charge-off effect as customers that are delinquent today and potentially would have charged off by now in a normal cycle, have instead been able to avoid charging off because of all the financial support they receive during COVID. Is that a risk that you worry about in your portfolio?

So great question. I think that dovetails into the question earlier you're starting to see some of the pressure start to creep up the risk bands. And I think that is something that everybody is watching Are some of those middle income, American starting to feel the pressure that the lower and moderate income Americans it fell last year.

Right? And this has been a theme that we've talked about, I think, for over 18 months that the stimulus that had built up and the savings that were in place for the lower and moderate income American had been depleted. And those are the people that we do see our portfolio. That's why you're seeing the peak losses come through because that has already happened. And now we've taken credit actions to make sure we've taken care of the populations that we see at risk.

But I that's why partly you think there's going to be a prolonged period of time for losses to get all the way back down to the 6% range because the stress is still there. And that's the issue with our economy right now is this prolonged period of high inflation, high interest rate, consumer debt is high. It's impacting folks. So it's a concern, but I don't see it as something where there's going to be a next wave coming through because we're really on top of this.

Understood. That's very helpful. And then a follow-up with your CET1 now at 13.8%, it's very close to that initial target that you laid out at your Investor Day is it reasonable to start modelling buybacks as you cross that 14% threshold?

So what I would say is our first binding constraint is total risk-based capital and that needs to get above 16%. And then I will share this with you. I think I've mentioned this on previous Investor Day, but identify and then we have a last on slug of Cecil phase-in that will happen in January 2025 in the first quarter '25, and that's 65 basis points. So we've got to care for that care for the expected growth in the portfolio and downs. And that's when and then obviously continue to look at our debt stack and other things. But yes, I think that's when you start to think about we're where we need to be start having considerations of other capital opportunities.

Very helpful. Thank you for taking my questions.

Vincent Caintic with BTIG.

A good morning. Thanks for taking my question. First question, lots of focus on women's, specifically the loan yields. So understanding that the loan yield was down quarter over quarter due to seasonality. I wanted to get a sense of how much of you've been able to add price has a CFPB mitigant. So I was wondering if there's a way to to maybe separate out the seasonality time versus is that the pricing you've been able to put in? And then separately, if there's any other impacts. So for instance, the tightening credit underwriting, that's some maybe pushing you of market and therefore having a lower price.

Yes, NIM. the 18% this quarter being down 70 basis points linked quarter. That was really pressured from the the sequentially higher reversal of interest and fees as well as that delinquencies improving coupled with a mix in the book as we're booking fewer private label cards that tend to have some more late fees and we're seeing a little bit lower yield from those so that's a result of having a little bit from that early-stage delinquencies. And so you should expect the net interest margin to come back up in the US third quarter seasonally also aided by lower reversal of interest and fees in the third quarter as you'll have a meaningful reduction in losses.

As it relates to your question on how much of the mitigation from the mitigation action APRs are built through. Again, it takes a long time for APRA changes to burn into that full rate yield. And yes, we've been really consistent on saying that you don't put that chart together, I think over a year ago to illustrate how long that can take it down. So it's not a meaningful impact in this quarter. It will just continue to slowly steadily impact the improving loan yield.

But then you also have, like I mentioned earlier, risk mix changes, product mix changes, and you could have on a lower interest rate environment at some point.

Okay, that's helpful. Thank you. And then a second question just on the credit reserve. So it was nice seeing the credit reserves dropped this quarter alongside the your execution on competitors for better losses for the quarter. Just wondering as for your expectations for Q3 and Q4, is your your expectations for the full year built into the credit reserves. So we should it should just expect credit reserves is sort of stable at this rate going forward? Or as time goes on and you're actually able to you execute on the guidance for the third and fourth quarter loss rate, we should be expecting that credit reserve to continue to come down?

Yes. So what I would expect to happen is pleased that the reserve rate came down this quarter was funny because we had a prior question. Do you ever see a point where you could have peak losses and have a reduction in your reserve rate and it just happens that.

Yes, we can and we did write this quarter, we had peak losses and we have our reserve rate coming down. And that's a reflection of the better credit quality and delinquency that's in the current portfolio. So as the year goes on, if everything holds steady and I expect that was a seasonal drop in the fourth quarter. And that's again why we have confidence at the end of this year, we'll have a lower reserve rate than where we exited 2023. But I do expect a pretty stable reserve rate, not expecting a sharp declines in the reserve rate. Consistent with what we've said, we expect a slow, steady improvement in the portfolio quality over time?

Yes, I would expect something similar on with the reserve rate over time. And the other part of this is, as I mentioned in the prepared remarks, our weightings of adverse scenarios remained unchanged at this point. So the change from last quarter this quarter is solely due to the improving credit quality in time as we have more confidence in a more benign economic outlook, those can get unwound, but that will be us and much further down the road.

Okay, great. Very helpful. Thanks very much.

John Pancari, Evercore ISI.

Good Morning. On the on late fee side, again, I know you removed it from your outlook. I guess just as it is and from what you're seeing in terms of the expected impacts, has the expected impact to revenue from the? We see no, on any of those expectations? Have they changed at all and in know as well as the magnitude the offsets that you expect anything behind the scenes? Has it changed at all in terms of the expected impact? I'm aside from I know your efforts too dialed in the pricing changes, et cetera.

Well, I wouldn't say that anything's changed in terms of our approach or the strategies, right? I mean these It's unfortunate. I mean, this is what happens when you get irregular, you're making changes probably not fully understanding the impact of what this would mean to all consumers. We are moving forward with higher APRs for everyone. We've introduced other fees or the policy changes that are in place. We've put this dossier, the paper statement fee and there's not something that we necessarily thought of as a normal course of action would have done.

Were it not for the CFPB making this rule change, but we are rolling that out, I'll say, thoughtfully and watching the changing consumer behaviour as it relates to APRs for private label and things like that. We're not seeing any change in behaviour. What we are seeing with the paper statements, even as you would expect, many are docked into good opt into a digitally, which will benefit our expenses over time, which was great because we have a real nice opportunities that drive people to over 100% digital engagement. So I'd say everything that is happening right now is happening as expected.

Okay, thanks. That's helpful. And then separately on the funding side, I know you indicated deposit cost stabilizing. Could you give us a little bit more color there, what you're seeing and you're able to see the I guess your expectation of the trajectory here on deposit costs that may be, if you can just comment a little bit on how you expect deposit growth, some progress in coming quarters?

Yes. So we've got our direct-to-consumer deposits sitting at about 40% of our total funding. And we've communicated our goal is to get to 50% of our funding from direct to consumer deposits and expect that each quarter here out will continue to grow thoughtfully with that on our pricing because of the way we are structured, we don't have brick and mortar and almost anyone of checking accounts, we are comfortable being at towards the top of the league table.

As you see deposit pricing come down some we think we actually were just in market recently with a small reduction in some of the deposit pricing. So we're monitoring it. We're very actively on monitor, make sure that we're getting the growth in deposits that we expect. And of course, I expectation is pretty stable right now. But if there's sharp declines in Fed funds and the market moves, we'll be prepared to move appropriately but making sure that we are where we want to be positioned to keep attracting deposits.

Okay, great. Thank you.

Terry Ma, Barclays.

Thanks. Good morning. I think you indicated you don't expect much incremental revenue from the mitigation actions this year. Can you maybe just talk about how the pricing actions and the incremental fees are are progressing and when you would expect more meaningful cuts from those measures?

Yes, I think when it wedges in is the best way to say it, right? So every month that goes by more and more of the portfolio of spend volume or balance will be subject to the higher APRs. And that just takes time. And I'll just point you to the chart that you put out there as an illustration previously gives you an idea of where are you 12 months after that.

And so you're only partway through the benefit of a full 12 months after the fact that you increased the APRs. On paper statement fees. It's not a large amount in the USA. Certainly not this upcoming quarter. As we get into next year, it will become a more meaningful number. But even then, the expectations, we're going to have a lot more customers going paperless and digital.

Other policies or policy change that we have and waiver policies. I think all those are going to go into effect and some of this probably was remiss in saying this earlier, if I didn't is we're not trying to put these actions in place to accrete a ton of revenue in the near term. While we wait for resolution on the litigation.

We are trying to very thoughtfully with our brand partners time, the rollout of these of these things so that we're not doing anything detrimental to the consumer before something like the late fee drop goes. And if we do have to put some things in place earlier where we are and there may be a point where there's some consideration of investing more in back into the program in consideration with that brand partner.

Got it. That's helpful. And then on the reserve rate being lower, as you exit this year compared to last year. It might take another peer had initially messaged that earlier this year, but is now indicating and kind of like a flat reserve ratio year-over-year. So maybe just speak to your confidence and confidence in the macro and the performance of your portfolio to take that reserve rate lower end of this year?

Yes. What I say is that I can't speak to everyone else's models, right? But industry wide in calls, we're hearing some normalization seasoning of recent vintages, consumer pressure. We are creeping up into different risk score seems to be a theme for them. Now what I remind you of is that we moved our reserve rate up earlier, then others based on anticipated impacts to our customers have high inflation and it proved to be the right action as we've had a stable reserve rate for over six quarters.

So based on the expected stable and slightly improving macro conditions. Our improved credit quality and results in delinquency should allow for modest reductions of our reserve rate over time, again with Q4 having the normal seasonal reduction before the first quarter down increases back up a little bit, but that's what we're expecting to see.

And we feel very confident in our process. We were and we use the term conservative, I'd call it just prudent, right? We have a very experienced team of people at this company who've been through different macro environments, and we knew to get ahead of this thing early and anticipating what inflation can mean to our customers now others didn't increase their reserve rate to the degree we did. And now they're continuing to see pressure. Maybe they need to get to where a different spot than where we are, but we feel very confident with where we are, and I'm confident in the guidance that we're giving.

Great. Thank you helpful.

Reggie Smith, JPM.

Hey, good morning. I guess real quick, can you remind us what proportion of your portfolio and has been or you've been able to kind of implement or had the partner agree to some of these mitigation efforts and then I have a few follow-ups. Thank you.

Yes, we have not given a proportion of the portfolio, but I would tell you that conversations have happened with 100% of the brand partners. And then as we had talked about previously, each brand partner is unique. Some are opting for APR somewhere in promo fee. Somebody accompanies this others may introduce other fees for credit. Some are changing now service-level agreements serving strategy.

So I mean, there's a lot that goes into these things and others have to are discussing a partner compensation changes with different revenue share things. So again, our commercial team is very active with all of the partners. And as I mentioned earlier, that's why you used the word thoughtful rollout of these strategies.

I guess with that said, I would imagine it right now given the uncertainty that I guess any agreement that hasn't been struck was probably on hold that we get more clarity?

I don't know if I would use the word on hold. I'd say they're they're all progressing and in a state of readiness to take appropriate action and the lead time is our friend. Let's just call that what it is right. Every month that goes by and delays our company is getting stronger and stronger from a capital standpoint a macro environment's improving. We're in a better state of readiness for whatever we have to do systemically from a technology side to implement product changes so on and we're feeling very good about our ability to get strong returns, should a regulatory change be put in place.

Yes, that makes sense. And then on if I could ask when I look at the model. I guess the processing costs were down sequentially, definitely low. And then we had expected you called out, I guess, some some efficiencies there. What's driving that? Is that the Fiserv deal? And how sustainable is that kind of run rate that we have there?

Yes. So as I've explained with the expenses, we've had a I'll say probably a low point for the year, right? We've had benefits year over year as our fraud team has done an amazing job on getting fraud strategies in place to tighten things down. The whole industry experienced on some fraud attacks last year now in most industries got under control. And our team certainly does.

We are going to see an increase in expenses in the third quarter because you've got Saks coming online, right? So that's a portfolio purchase for servicing and the costs involved with getting that up and going as well, you're going to see an increase in marketing sequential marketing spend up about $10 million in this in the third quarter. And then in the fourth quarter, expenses will rise again from there because fourth quarter is always sequentially higher for us as a result of, again, further increases in marketing for the holiday seasons as well as our employee benefits costs are seasonally higher in that quarter.

Got it. Perfect. Thank you.

Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Ralph Andretta for closing remarks.

Sure. Well a couple of rankings for secular period for fielding all the questions today. I appreciate that very much, and thank you to all of you for your continued interest in bread. We look forward to talking to you again in the next quarter, and everybody have a terrific day. Take care now.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.